State cap-and-trade systems offer evidence that carbon pricing can work

Author

Professor of Energy and Environmental Policy and Director of Center for International Environment and Resource Policy at The Fletcher School, Tufts University

Disclosure statement

Kelly Sims Gallagher receives funding from The William and Flora Hewlett Foundation, Rockefeller Brothers Fund, Breakthrough Energy Coalition, BP, and ClimateWorks. She is affiliated with the Belfer Center of Science & International Affairs at the Harvard Kennedy School, the Harvard University Center for Environment, The Tyler Prize, and The Energy Foundation.

Achieving that goal will require swiftly transforming the energy, transportation, housing and food industries, and more. Although these tasks are daunting and the Trump administration is dismantling federal regulations aimed at reducing climate-changing emissions, cost-effective policy tools that could help do exist. And individual U.S. states and regions are using them to make significant progress to reduce emissions.

Emissions trading

Along with the results from similar efforts in Europe, Asia and Latin America in more than 40 countries, these policies have amassed ample evidence about what works in practice, what doesn’t and why.

As my team explained in Climate Policy, an academic journal, there are two basic flavors of carbon pricing: cap-and-trade – otherwise known as emissions trading systems – and carbon fees or taxes. Some jurisdictions also use hybrid blends of the two approaches.

U.S. carbon emissions trading until now has been limited to the Northeast, some mid-Atlantic states and California. But many countries, including Canada, Mexico, China and the entire European Union, are levying carbon taxes, running emissions trading systems or using a mix of the two. Washington State’s citizens will soon vote on a ballot initiative that would impose a carbon pollution fee on major emitters and collect revenue to be mostly spent on clean air and clean energy investments.

Emissions trading systems cap the total emissions allowed at a certain level. The government then allocates emissions permits to factories, utilities and other polluters either for free or through auctions.

Companies capable of cutting their own emissions may choose to do so, and then sell their permits to other polluters to make money. Conversely, businesses can buy permits at the prevailing market price to avoid having to directly cut their own emissions in their business operations.

As you might expect in carbon markets that depend on willing buyers and sellers, the cheapest emissions reductions usually happen first.

And California’s carbon emissions are on track to fall to 1990 levels by 2020.

In no jurisdiction anywhere in the world that we studied did emissions increase as a result of carbon pricing.

Faster improvements

With subsidies, tax incentives, regulatory policies, fiscal incentives, innovation investments and other efforts to slow the pace of climate change being deployed at once, it is hard to know which of them is best at reducing emissions.

But it is possible to see that the two regions that have implemented carbon pricing have often reduced their emissions faster or in greater absolute terms than regions that have not. Massachusetts and New York, for example, reduced their emissions by more than 20 percent overall between 2000 and 2015, about twice the U.S. average of 10.3 percent.

Carbon pricing policies can help governments raise money. But revenue from carbon taxes or the proceeds from permit auctions can be returned to taxpayers as well.

All of the states and countries using carbon pricing policies also have additional policies working alongside the carbon taxes or cap-and-trade programs to reduce emissions, ranging from performance standards for energy efficiency to tax incentives. These policies can also work well, but they can be more expensive approaches to reduce emissions, and sometimes they even undermine the carbon pricing policy.

The Northeastern states averaged 3.2 percent annual growth between 2012 and 2017 – near the U.S. norm. But their Regional Greenhouse Gas Initiative led to $1.4 billion of net positive economic activity because of the reinvestment of the auction proceeds in activities that generate economic benefits for the region between 2015 and 2017, a recent study found.

Critics of emissions trading policies have argued that the prices that have emerged in these systems are too low to spur emissions reductions. The evidence presented above shows that, in fact, they do cause pollution to decline. If advocates prefer steeper emissions reductions, then the emissions cap must be tightened.

Alternatively, governments can switch to carbon fees or taxes, which creates greater price certainty in the market – and which can also be ratcheted up as desired to achieve faster cuts in pollution. Either way, I believe that it is now clear that carbon taxes and emissions trading programs create a long-term signal for the marketplace that induces changes in consumer and firm behavior.

Given the strong real-world record on the effectiveness of carbon pricing policies and the fact that they don’t have to cost taxpayers or take a toll on the economy, I expect more states will adopt them in the coming years.

A federal approach would of course be much more efficient and effective. But it would require congressional action and a presidential signature, neither of which appear to be imminent especially when President Donald Trump says he is not even sure that climate change is man-made.